Be Wary Of Sapporo Clinical Laboratory (TSE:9776) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sapporo Clinical Laboratory (TSE:9776) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sapporo Clinical Laboratory is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = JP¥535m ÷ (JP¥17b - JP¥3.3b) (Based on the trailing twelve months to March 2024).

Therefore, Sapporo Clinical Laboratory has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.1%.

See our latest analysis for Sapporo Clinical Laboratory

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sapporo Clinical Laboratory's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sapporo Clinical Laboratory.

What Can We Tell From Sapporo Clinical Laboratory's ROCE Trend?

On the surface, the trend of ROCE at Sapporo Clinical Laboratory doesn't inspire confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 4.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Sapporo Clinical Laboratory's ROCE

Bringing it all together, while we're somewhat encouraged by Sapporo Clinical Laboratory's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Sapporo Clinical Laboratory, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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